CarGurus, Inc. (CARG) Q4 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the CarGurus Fourth Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only-mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rodney Nelson, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon and welcome to CarGurus' fourth quarter 2019 earnings call. We'll be discussing the results announced in our press release issued today after the market close and posted on our Investor Relations website. With me on the call today is Langley Steinert, CarGurus' Founder and Chief Executive Officer; Jason Trevisan, Chief Financial Officer; and Sam Zales, President and Chief Operating Officer. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements concerning our financial guidance for the first quarter and full-year 2020, management's expectations for our future financial and operational performance, our business, growth, and international strategy, and other statements regarding our plans, prospects, and expectations. These statements are not promises or guarantees, and are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed today and in our most recent reports on Forms 10-K and 10-Q, which are on the SEC's website and the Investor Relations section of our website. We undertake no obligation to update forward-looking statements, except as required by law. Further, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release, issued after market close today. The press release and our SEC filings can be found in the Investor Relations section of our website at investors.cargurus.com, and the SEC's website at sec.gov. Our fourth quarter investor presentation can also be found on the Investor Relations section of our website. With that, I'll turn it over to Langley.

Thank you, Rodney. And thanks to everyone for joining us today. CarGurus finished 2019 with a strong fourth quarter. Our U.S. marketplace generated continued traffic and lead growth, and for the full year 2019, we delivered over 65 million connections and over 38 million leads, supporting what we believe is our industry-leading ROI for our paying dealers. We are seeing consistent new product adoption, as we ended 2019 with a multi-product attach rate of 30% in the U.S., with over 1,000 U.S. dealers subscribing to at least three of our products. These trends are encouraging, as multiple product penetration not only lifts spend per dealer, but we see improved retention with multi-product dealers as well. In addition, we continue to improve our consumer value proposition, and completed the roll-out of our second consumer financing partner, Westlake Financial, in the fourth quarter. With Westlake on board, we are enabling a wider variety of consumers to see loan pre-qualifications, and now offer loan pre-qualification on roughly 85% of our U.S. used car listings, creating a richer experience for our industry-leading audience, and bringing us closer to a more complete online transaction. We also began processing our first fully digital transactions in our peer-to-peer marketplace for the fourth quarter, bringing trust and transparency to private party transactions. Finally, our international business continues to scale efficiently, as strong audience and lead growth is yielding healthy paying dealer additions in each of our commercialized markets. Over the course of 2019, we invested significant resources to increase our brand recognition, boost direct traffic, improve the consumer experience, and ultimately increase the quality and quantity of leads we deliver to dealers. We made important progress against each of these initiatives throughout the year, and that continued into the fourth quarter. In the quarter, we attracted 34.2 million average monthly unique visitors to our U.S. site, and these users generated 91.2 million average monthly unique sessions, representing a two-year compounded annual growth rate of 15%. Our investments in brand are key drivers behind growing brand awareness and direct app-based and owned channel traffic. Traffic from these sources increased 16% year over year in the fourth quarter, representing a two-year compounded annual growth rate of 20%. In addition, efficiencies in our algorithmic traffic acquisition strategies continued to yield declining cost per lead in our U.S. business. We are also investing and improving the consumer experience in our marketplace. While we are always making tweaks to deliver the best possible experience, we will often produce more substantial changes, such as our mobile interface overhaul in early 2019, and the roll-out of our consumer financing platform over the last several quarters. These improvements are helping our audience not only find a great deal on the exact vehicle they are looking for, but they are executing more elements of the purchase process with our loan pre-qualification engine. The net result is a more educated consumer with a higher likelihood of conversion, supporting strong lead growth in dealer ROI. For the full year 2019, we grew leads to dealers 14% year over year, while leads to our paying dealers grew in the high-teens. Over the last two years, we have grown leads at a compounded annual growth rate of 22%, reflecting our optimization towards leads over simply growing traffic to drive dealer ROI. We invest in these improvements on the consumer side of our marketplace to provide a high-quality customer acquisition channel for our dealers. As a result of these initiatives, we continued to see solid net paying dealer additions in our U.S. business, despite our elevated market share. We added 298 net new paying dealers to our U.S. business in the fourth quarter, bringing our U.S. paying dealer phase to an industry-leading 28,990. In addition, our existing paying dealers are increasing their spend with us, as we grow our audience and launch high ROI listings add-ons and other digital marketing products. In the fourth quarter, U.S. AARSD grew 19% year over year, and we generated our best ever AARSD growth contribution from new products in the quarter. As we move into 2020, we are once again establishing several strategic initiatives, to which we will devote company-wide attention and substantial resources. While we will discuss our strategic initiatives in greater detail on our Q1 2020 earnings call, I do want to highlight some of the projects we will be focused on in the coming year. As in past years, we are maintaining our focus on growing our audience, improving the consumer experience, increasing visitor conversion, and delivering high-quality lead growth. This focus will span several initiatives, and impact both the consumer and dealer side of our marketplace. On the consumer side, we will continue to invest in building our brand to raise awareness and drive more direct traffic to our marketplace. With over 5.5 million listings from over 40,000 dealers in the U.S., and unmatched transparency supported by features such as our IMV best deal first organic surface results, and new features such as consumer financing, we believe consumers need only search CarGurus to find their next vehicle. In 2020, we are investing in an ad campaign that we believe will spell out our differentiated value proposition more clearly to consumers. In addition, we will have a renewed focus on consumer retention through channels such as e-mail, and by creating a richer mobile application experience that will allow us to build a more direct relationship with our consumer audience. On the dealer side, we are focused on creating more incentives for becoming a paying dealer by growing the value we provide our subscribing dealers, and making us a critical input to a dealer's growth and profitability. This includes building a deeper portfolio of listings and digital marketing products that unlocks more of the $14 billion dealers spend annually on digital marketing. We continue to see strong adoption of new listing programs, such as delivery, which now boasts over 1,000 customers, and our RPM suite, featuring new social ads products, which is now live in the U.S. We are only a few weeks into the launch of RPM, but we are encouraged by the early performance we are seeing. Our product and engineering teams have rolled out several exciting products over the last two years, and we are always looking for new ways to provide value to our consumers and paying dealers. As we contemplate long-term business needs, we are increasingly leaning on a three-pronged approach of building, buying, or partnering to offer solutions that support our growth. With that in mind, in January, we announced our acquisition of Autolist. Like CarGurus, Autolist is a technology first automotive marketplace that features a best-in-class mobile application, a talented product and engineering team, and a large primarily organic audience of car shoppers that we believe will boost CarGurus' already leading position in the U.S. market. Paying dealers on the CarGurus network will have the opportunity to augment their exposure by gaining access to the Autolist marketplace. In addition, we will strategically acquire traffic across the two marketplaces in an effort to drive even better unit economics for our U.S. business. We're excited by the opportunity Autolist unlock to grow our already leading audience and help us become an even larger more critical partner to driving sales for our dealers. On behalf of everyone at CarGurus, I'd like to welcome the entire Autolist team to our Company. Turning to our international business, we continue to efficiently scale our audience across all our markets, creating attractive, high growth marketplaces for dealers to list their vehicles. Including the impact of PistonHeads, our international marketplaces attracted over 10 million average monthly unique visitors who logged 23.8 million average monthly sessions in the fourth quarter, representing 75% and 83% year-over-year growth respectively. Coming into 2019, we began investing in our brand in the U.K. in addition to the brand investments we started in Canada in 2018. While these investments are still in their relative infancy, we continue to see an encouraging impact on our cost of consumer acquisition. In the fourth quarter, our cost per lead fell 21% year-over-year in Canada and 39% year-over-year in our core U.K. business. These trends are allowing us to maintain an aggressive investment strategy while demonstrating rapidly improving unit economics. We continue to deliver strong net dealer additions in our international business as we added 618 net new paying dealers in the fourth quarter and we now count 7,125 total international paying dealers. Before Jason discusses our financial results and guidance, I want to make a few comments regarding our 2020 outlook. First, we continue to prioritize high ROI lead growth and our core marketplace businesses. A theme you've heard from us several times over the last few quarters. This is evidenced in the spread between our U.S. lead in connection growth rates over the last 2 years. Furthermore, we may also make decisions about our site experience that could reduce short-term revenue, particularly within our advertising business. In 2020, we are taking active steps to improve site experience, consumer engagement and user conversion that will create even more value for our paying dealers. But these steps will likely reduce ad load and impressions. As a result, we expect de minimis growth from our advertising business this year. Our management team prides itself and having a long-term growth mindset and we believe these steps we are taking to drive marketplace subscription revenue growth, invest in new products and focus on value creation for consumers and dealers are the right ones for the business over the long-term. Second, while we have always prioritized lead growth as it has the most direct relationship to listings revenue growth, we also fully expect to continue to grow our U.S. audience in 2020. Though we generated modest U.S. traffic growth over the last 3 quarters, we are seeing improved first quarter traffic trends in our U.S. business and continue to see healthy lead growth trends as well. As I noted previously, we will continue to invest in both brand and our algorithmic traffic acquisition strategies to grow our audience. As well as introduce new campaign messaging that we believe will further differentiate our unique value proposition to consumers. In addition, we'll be committing resources to better retain our users in the future to reduce our cost of consumer acquisition over-time. Third, I'm very pleased with the operating leverage our core business is demonstrating. A trend we are confident will continue in 2020. Jason will provide more details, but our U.S. business continues to deliver operating leverage via our sales and marketing as we progress towards our long-term operating profit and adjusted EBITDA targets. We are investing prudently in our international marketplaces as our unit economics trends improve and give us confidence in the future profitability in these markets. Finally, we will continue to invest in new products such as RPM, P2P, consumer finance, trade-in and other long-term initiatives to unlock future growth opportunities. In addition, we look to augment our business through M&A as we aim to become a multi-billion dollar revenue business long-term. To wrap up, I'd like to recognize all of our employees in North America and Europe that delivered such tremendous results in 2019. CarGurus is nearly a 1,000 employee strong and our success would not be possible without the contributions from each one of you. We have a lot of exciting work ahead of us in 2020 and I'm looking forward to working with all of you to grow our business and build the world's most trusted and transparent automotive marketplace. With that, I'll turn the call over to Jason.

Thank you, Langley. I'll provide a detailed overview of our fourth quarter performance followed by our guidance for the first quarter and full-year 2020. Total fourth quarter revenue was $158.2 million, up 25% year-over-year and roughly $3 million ahead of the high-end of our guidance range. Our marketplace subscription revenue grew 24% versus the year ago period, to $140.6 million and advertising and other revenue grew 34% year-over-year to $17.6 million. Focusing on performance by geography, our U.S. business accounted for 94% of total revenue in the fourth quarter. U.S. revenue grew 22% year-over-year to $148 million, while international revenue grew 104% year-over-year to $10.2 million. Turning to paying dealer count, we surpassed 36,000 global paying dealers in the fourth quarter. We ended Q4 with 36,115 total paying dealers representing an increase of 916 from Q3. In the U.S. we finished with 28,990 total paying dealers up 5% year-over-year and an increase of 298 from the end of the third quarter. This compares to 261 U.S. net dealer additions in the third quarter and 406 net dealer additions in the year ago quarter. As we stated often quarter-to-quarter net dealer adds will likely remain gradual as our U.S. paid dealer market share increases. In our international business, we added 618 net new paying dealers in the fourth quarter. We saw strong paying dealer additions across each of our commercialized markets, Canada, the U.K. and Italy. Further, PistonHeads delivered its best quarter of net dealer addition since we acquired it in Q1, 2019. We ended the year with 7,125 international paying dealers, up 81% versus the year ago period. As we expected entering 2019, connection in lead volume was our largest driver of U.S. growth for the full-year but we also anticipated new products would play a larger role in AARSD growth than ever before. In the fourth quarter, we generated our best ever U.S. AARSD contribution from new products and we saw roughly even contributions to AARSD growth from each of our 3 key levers, connection in lead volume, new products, and unit pricing and packaging. U.S. AARSDs grew 19% year-over-year in the fourth quarter to $17,576. Throughout 2019, we saw strong demand for new products such as delivery and audience retargeting and we're excited by the Q1 launch of our social ads product and RPM digital marketing suite. In 2020 we expect contributions from new products to continue to grow that we once again expect connection and leads volume to be the primary driver of U.S. AARSD growth. As we have stated often, we will remain judicious and gradual with unit price increases to maintain what we believe is industry-leading ROI for our dealer customers. International AARSD grew 13% year-over-year to $5,399. Similar to previous quarters we excluded the impact of PistonHeads in our Italian marketplace from this metric. However, we will begin to layer in each business is performance into the AARSD calculation over the course of 2020 as we accrue 4 trailing quarters of operating performance for each marketplace. As a result, we continue to expect lumpy international AARSD growth rates as we both include these businesses and generate high percentage growth in international paying dealer count. I'll discuss our expenses and profitability on a non-GAAP basis, which backs out our stock-based compensation expense, amortization of acquired intangible assets and acquisition-related expenses. Fourth quarter non-GAAP gross margin was 93.4% down roughly 120 basis points from the year ago quarter. As we discussed last quarter, 2 factors contributed to the year-over-year contraction in gross margin percentage. First, we recognized media costs associated with our audience retargeting product in our cost of revenue. As this product scales, it will create a modest headwind to gross margins. Second, technology investments in our data center and cloud hosting expenses also contributed to the year-over-year contraction. However, these factors do not change our stated long-term operating income or adjusted EBITDA margin targets outlined in our investor deck posted on our Investor Relations website. Total fourth quarter non-GAAP operating expenses were $124.5 million, up 18% year-over-year. Non-GAAP sales and marketing expense grew 16% year-over-year to $98 million in the fourth quarter and represented 62% of revenue, down from 67.1% in the year ago period. The improvement in sales and marketing leverage is the result of our brand investments, driving more direct and own channel traffic in addition to on-site conversion improvements yielding better customer acquisition economics for our business. For example, though we meaningfully increased our U.S. traffic acquisition spend in 2019, we continue to see mid-single-digit declines in cost per lead in our U.S. business. This efficiency is a testament to the growth of our brand. The efficiency of our traffic acquisition team and the improvements we have made an on-site conversion. Our fourth quarter non-GAAP product technology and development expenses grew 28% year-over-year to $14.4 million representing 9.1% of revenue. For the full-year 2019, non-GAAP product technology and development expenses grew 43% year-over-year to $54.3 million reflecting the investments we have made to grow our product and engineering headcount. As we've noted previously, our product and engineering organization supports both our core business and emerging products such as P2P, consumer financing, trade-in and other initiatives that are generating de minimis revenue today. However, we believe these initiatives will unlock new revenue streams in large total addressable markets and represent future growth levers to our business. As we stated previously, we will invest prudently yet aggressively in pursuit of these growth opportunities. We generated non-GAAP operating income of $23.1 million in the fourth quarter, roughly $4 million ahead of the high-end of our prior guidance range. Our operating income outperformance was driven primarily by continued efficiency gains and traffic acquisition. Non-GAAP diluted earnings per share were $0.17 for the fourth quarter, roughly $0.04 ahead of the high-end of our prior guidance range. On a GAAP basis, we generated fourth quarter gross margin of 93.3% and total operating expenses of $134 million up 19% versus the year ago period. The increase in operating expenses was primarily driven by sales and marketing expense growth. Fourth quarter operating income was $13.6 million, up 98% year-over-year. Fourth quarter GAAP net income attributable to common shareholders totaled $13.2 million. Geographically, our fourth quarter U.S. GAAP operating income was $22.4 million, up 24% year-over-year. We had a GAAP operating loss of $8.8 million in our international business compared to an $11.1 million loss in the year ago quarter. Our improving operating performance in our international business is primarily driven by efficient scaling in our Canadian and core U.K. businesses. As Langley mentioned our cost per lead in Canada fell 21% year-over-year in the fourth quarter, while cost per lead in our core U.K. business declined 39% year-over-year. As I noted on our third quarter call, we still have meaningful ground to cover to achieve profitability in these markets. We continue to see encouraging unit economic trends in our international business and expect to reduce our operating losses in both Canada and the U.K. in 2020 relative to 2019. We ended the fourth quarter with $171.6 million in cash and investments, an increase of $7.3 million from the end of the third quarter. We generated $20.6 million in cash from operations in the fourth quarter and $19.2 million in non-GAAP free cash flow, which includes capital expenditures and capitalized website development costs of $1.4 million. During the fourth quarter, we withheld and remitted $3.7 million in withholding payments from RSU share settlements stemming from our equity compensation plan. We continue to evaluate this practice and may explore other avenues for managing tax withholding related to equity compensation going forward though no change to this practice is imminent. Before I provide our outlook for the first quarter and full-year 2020, I want to provide some additional context for factors impacting our revenue and operating income guidance. Please note that my commentary regarding our 2020 outlook and guidance reflects the impact of Autolist, which we acquired on January 16. First, we are expecting Autolist to contribute mid-single-digit millions of dollars of revenue to the consolidated business in 2020. While there are several similarities between the Autolist and PistonHeads businesses, we expect a shorter integration period for Autolist than was required for PistonHeads. We therefore expect to make material investments in Autolist this year to drive traffic and lead growth feeling a high-ROI value proposition for our paying dealers that we expect will scale beginning in 2021 as dealers lap a year on the Autolist platform. As a result, our full year 2020 guidance includes a roughly $7.5 million headwind to non-GAAP operating income stemming from these investments. Second, we are anticipating very little growth from our OEM and automotive partner advertising business in 2020 which represents the vast majority of revenue in our advertising and other line. There are several factors impacting the OEM ad business including the ongoing user mix shift from desktop to mobile, which creates downward pressure on ad impressions and CPMs that better service consumers on the devices they choose to use. Additionally, and as Langley referenced, we are making the conscious decision to reduce ad load on our site in an effort to improve the consumer experience, increase conversion, drive more leads to dealers and generate greater marketplace subscription revenue over time. While this decision certainly means forgoing short term transactional advertising revenue, we know this decision is in the best interest of both consumers and dealers and supports a healthier subscription business for CarGurus over the long-term. This impact is most evident in our first quarter guidance as we expect muted advertising revenue will yield relatively flat sequential total revenue growth from Q4, 2019 to Q1, 2020. Finally, we expect our non-GAAP effective tax rate to increase to roughly 27% for the full year 2020 as the impact of our equity compensation plan on our tax rate begins to normalize. This compares to our full year 2018 effective non-GAAP tax rate of 20%. With these factors in mind for the full year 2020, we expect to generate total revenue of $664 million to $676 million, representing 15% year-over-year growth at the high-end of the range. We expect non-GAAP operating income in the range of $78 million to $86 million. This represents a 12.7% non-GAAP operating margin at the high-end of the range, roughly 90 basis points ahead of our full-year 2019 non-GAAP operating margin. As I noted earlier, our full-year 2020 non-GAAP operating income guidance accounts for a roughly $7.5 million headwind from the impact of Autolist. Excluding the impact of Autolist, our non-GAAP operating income guidance range would have been $85.5 million to $93.5 million, implying a 13.8% operating margin at the high end or nearly 200 basis points ahead of our full year 2019 non-GAAP operating margin. We expect full year 2020 non-GAAP earnings per share of $0.50 to $0.55 reflecting our expected effective tax rate of 27%. Focusing on the first quarter, we expect total revenue of $156.5 million to $159.5 million. Non-GAAP operating income of $10 million to $12 million and non-GAAP earnings per share of $0.07 to $0.08. Much like 2019, we plan to align our consumer marketing spend during peak car shopping periods, which typically happen in the first half of the year. Although we are taking steps that will place pressure on advertising revenue growth in 2020, we are encouraged by the continued underlying strength in our core business that we believe is widening our leadership position among dealers. We continue to deliver improving unit economics that are driving operating leverage and margin expansion in the U.S. We are investing aggressively to grow our leading U.S. position and we are seeing solid traffic and lead trends early in 2020. We are selling seeds of growth via dealer products such as delivery and RPM, as well as in emerging areas such as P2P consumer financing and trade-in. Finally, we are efficiently scaling our international businesses and driving improving unit economics in our largest marketplaces in Canada and the U.K. I'd like to wrap up my prepared remarks by echoing Langley's thanks to all of our employees in the U.S. and abroad for their tremendous work in 2019. And we're looking forward to building an even stronger CarGurus in 2020. With that, we'll open it up for Q&A.

[Operator Instructions] Our first question comes from the line of Ralph Schackart with William Blair. Please proceed with your question.

Good afternoon and thanks for taking my question. First, just on the 2020 guide if we could revisit that for a second, I think Q1 contemplates about 17 or so percent revenue growth and midpoint for the full year is about 14% and you're coming off about 30% or so in 2019. So I know on the call Jason and Langley you talked about advertising impacting the 2020 outlook but just given how strong the business has been and continues to be, just curious if that deal sell in 2020 is purely caused by the advertising or if there is something else also sort of slowing? Wouldn't appear that way, but just wanted to start with the first question. Thanks.

Sure. Ralph, it's Jason. Thanks for the question. So as we said in the upfront remarks advertising is an area where we're expecting certainly muted growth versus historical trends. But also in our listings business there as you look at quarterly annualized growth, you've seen a downward trend there and so this guidance would assume that that would continue. Again, the biggest drivers of growth there historically have been adding new dealers and then growing AARSD. Our dealer adds we expect are going to continue to be gradual each quarter in 2020 and so we sort of taken away one of our biggest levers. So it's the combination of those 2, the continuation of the marketplace listings trend and then really a changing trend in advertising.

Okay. Then maybe just kind switching to the EBITDA guide. I think you called out about $7.5 million investment in Autolist. Jason, maybe first question there is, it seems like a relatively larger investment, maybe what the trends you're seeing there to sort of support that investment. Then two, you also talked about new ad campaign investments for resources for retention and then new products. Can you give us a sense of scale within those 3 categories, vis-à-vis what you called out for Autolist? Thanks.

Sure. Not sure if we're going to quantify relative to Autolist and the other things but I can speak to Autolist. So we're incredibly excited about Autolist and even since the acquisition, the integration has been going extremely well. What we see there is an opportunity to drive high-quality traffic, the same quality as on our site at very efficient volumes. Once we do have the integration complete, we're going to invest pretty significantly as we said, not only to keeping that team in place and growing that team because they innovating in some terrific ways that we can learn from but also to drive more traffic to that platform which they had not done as much as a standalone company but we are confident we can do with really positive unit economics. The reality of our business or the nature of our business is that we monetize those typically on renewal and so we need to invest in the traffic ahead of when we are able to monetize it. Hence, this year there is a loss of the magnitude that we talked about but we think that materializes in pretty significant traction on the revenue side next year. Your second question was around the efforts that we talked about with retention, new products. And what was the third?

You talked about a new brand campaign open as well. Thanks.

So, I'll take a shot at that. The retention efforts are largely in people resources and it's us developing features and products on our site that will allow us to build a deeper relationship with the consumer. And so those channels by nature are free that's why there is so compelling. So the investment there is with people. In new products, same. We have had a steady stream of products that we've introduced built by our product and engineering teams and we're going to continue to do that. A good portion of our engineering team is focused on what we call midterm new products. So these are not some of the longer-term big opportunities that you hear us talk about, but instead they're products that we can issue in the next 6 to 18 months. So that's a percentage of our engineers. Then on brand, we still expect absolutely to get leverage next year on our sales and marketing and so it's not so much that we are dramatically changing our investment in brand but instead, that comment was referring to the messaging of it and the positioning of our company that we're going to do, which we think better differentiates us and better explains how we're a better ROI to dealers and how we're a better experience for consumers.

Okay, that's helpful. Thanks, Jason.

Our next question comes from the line of Naved Khan with SunTrust. Please proceed with your question.

Thanks. This is Robert [ph] on for Naved what inning would you guys say that you guys are in, in terms of adding new products to the platform and what inning are you in, in terms of the attach rates, and are you guys seeing any strength in certain geos are certain dealers? Any color there would be appreciated. Thank you.

Robert, Sam Zales. I love the baseball analogy but I'm going to be careful there. I'd probably say very early innings. The attach rates that were mentioned in the early remarks are 30% multi-product penetration, which is terrific. A lot of that coming from a product that had been in the market for an extended period of time that was our first brand product -- dealer branding around their vehicle detail pages. It's called focus. Most of the other products that Jason just mentioned are very early stage so maybe a bottom of the first inning and we are excited about those. They are achieving strong growth in the early phase across all of our market segments. I'll mention a couple that I think you've heard about. The delivery product we think brings a tremendous consumer and dealer value proposition for consumers. It's more choice both in market vehicles as well as those delivered across the country for dealers. Its exposure of their inventory to a broader set of consumers. We think this is the first step in what we think of as digital transactions and we're finding good uptick there for those dealers who today are enabled to deliver a vehicle either in their local market or more further across the country and we'll get more of those dealers both independent and franchise to do that. The other set of products is this RPM, our digital marketing suite. As I said, the branding product was the first to go out the door a couple of years ago. Now, we have a prospecting product which is what we call amplify an ability for a dealer to target or retarget a consumer that came in and looked for a vehicle that they sell but did not look at that particular dealer's inventory retargeting them back from other sites to that deal site. And then we launched its social product just at the beginning of this year. We're excited about the uptick is good and we'll give you more information on that after the first quarter. The goal here is to put our audience the leading down funnel consumer audience in front of dealerships and drive those consumers to the dealership's website. And we're really excited about that but we're in the very early innings on that front. Again, I'd say, all segments from the small independent dealers to the more sophisticated franchise dealers interest and buying into those products. Price point defers obviously across those segments.

Great, very helpful. Thank you.

Our next question comes from the line of Tom White with DA Davidson. Please proceed with your question.

Great, thanks for taking my question. One of the traffic you guys have highlighted how you've diversified sources of traffic and you're very focused on direct channels. I'm just curious sort of at a high level if it's a strategic focus for you at all to maybe make your business over time kind of less reliant on traffic and leads as a growth driver? I don't know maybe from more subscription-based products for dealers that aren't audience dependent or is traffic kind of always going to be the lifeblood? Then just secondarily Langley, you mentioned improving ways to retain customers as opposed to having to reacquire them. Just hoping you could give a bit more color on how you hope to achieve that. Thanks.

It's Langley. So we spent a lot of time in these last 4 quarters focused on conversion. So while traffic is always good, traffic per se is not necessarily the goal. Traffic that converts to leads and in turn leads to our paying dealers as opposed to our free dealers is always more of our focus. In the end of it all, it's the sale of a car that's the most important thing. So for instance in 2019, I believe our average lead growth number was in the14% range. So you can see that traffic and leads don't always necessarily correlate. As a Company, certainly in the U.S. as we think about more efficiency, it's really not always going to be about more traffic. It's going to be more about can we acquire traffic that converts? I think another kind of evidence of that is the fact that we were able to drive quite a bit of efficiencies in our cost per leads. I think Jason talked a little bit of that in his prepared remarks around in the U.S. we're able to drive our cost per lead down quite a bit. Actually, in both our domestic and international markets we are able to drive the cost per lead down. So again, it's not always about traffic, it's about leads to our paying dealers that in turn convert. So while we're always -- we'd always love to have more traffic, it's really more about efficiency in selling cars. In terms of retention, certainly, a focus of ours is not having to reacquire customers is always a good thing. Obviously, it's considered purchase that is over typically a 4-year span between repeated purchases often. So we're spending a lot of time thinking about how we can retain customers that we've already engaged with. Certainly, a big focus of ours.

Thank you.

Our next question comes from the line of Dan Kurnos with The Benchmark Company. Please proceed with your question.

Thanks. Just a couple from me. I guess maybe high level, Langley, I don't want to call it a complete refresh, I guess, on the consumer-facing side, but working on the app, reducing ad loads, I guess why now on that? And I guess maybe how you would view sort of order of magnitude to the changes you're making. I'm assuming going forward that you expect kind of a return to OEM sequential growth over time. But just kind of how you view that sort of channel as it was -- I think you guys sort of unit is found money in the past.

Yes. I mean, I probably would just reiterate some of the comments Jason's made around -- we made some conscious decisions going forward in this next couple of quarters to reduce ad load, improve site experience, which can oftentimes lead to higher conversion rate for customers buying cars. Yes, OEM advertising is always nice to have, but if we see the trade-off being an improved experience for our dealers selling more cars, generally, because it's a subscription business we would always prefer our dealer subscription revenue over advertising revenue from OEMs just because it's stickier. It's recurring. It's a repeatable business. So if push comes to shove, we're probably always going to err on the side of improving the customer experience and trying to drive more conversions to our dealer customers, which, as Jason said, may lead to some short-term lower overall revenues in a given quarter, but we think in the long term, it's the right business decision for the brand, for both our consumers and our dealers.

Sure. I get that, Langley. Just to be clear though, in terms of timing of this, it's not a massive overhaul, but it's not in response to anything on conversion challenges or anything else. It's just simply tweaks or optimization?

It's an ongoing process.

All right, fair enough. And then Jason, maybe just some color. Is there any way -- I doubt we'll get specifics, but any way to frame up how much you think consumer finance and P2P can be material this year? And obviously, you're investing -- I don't want to compare it to the last time you guys did kind of a major brand campaign. But you're investing, I guess, for AARSD re-excel next year. I don't know if there's any way to kind of frame how you think order of magnitude that turns out?

So on the first question, yes, you've heard us say dozens of times that we don't break out product level revenue. I would say that consumer finance is -- I mean, that is a material revenue stream for us today, and it's got a nice growth behind it from adding Westlake. Without getting into the accounting specifics, when we sign these deals and bring on these lenders, we sort of straight line the revenue, and so it's an odd growth trajectory, despite the fact that we're growing volumes and growing units. But that is a not immaterial revenue stream. That is growing nicely from '19 to -- we expect it to grow '19 to '20. Your second -- I'm sorry. I didn't follow your second question on resources.

Well, I just -- my first -- the other piece of it was just P2P, if there was any color whether that becomes a material this year. And then the question just on sort of the comparison between the last time you guys were in a large brand campaign. And obviously, your expectations, it sounds like, for AARSD growth to re-accelerate next year, as that kind of flows through, and lead volume. Just maybe order of magnitude.

Yes. Sorry, I forgot on P2P. On P2P, we've made some great product progress there, and you heard about our fully digital transaction milestone. That revenue is still small. I mean, it's -- the volumes are growing nicely. We're getting more people to list. It's a very complex problem that we've started to crack the code on. But the revenue, for instance, there is not as near-term or significant as consumer finance. I apologize. I'm still not following the question. In terms of AARSD, we don't guide to 2020 AARSD growth. I think what we talked about in the remarks is that we still expect lead volume to be the key contributor there. However, new products have been growing as a percent of total contribution to AARSD, and we definitely expect that to continue this year.

Yes, it's fine. I'll take it offline. I was looking more for '21 sort of re-excel, but that's fine. I'll get back in queue. Thanks.

Our next question comes from the line of Daniel Powell from Goldman Sachs. Please proceed with your question.

Great, thanks for taking the questions. Two, if I may. On the first, just curious to see what you've been hearing from dealers to start the new year to end last year. Just curious of how they're viewing your ROI has changed at all with some of the detail that you're seeing in your lead growth. I'm just curious if there's any change in context there. And then the second question, a bit more timing related around the brand campaign. You mentioned that it's definitely targeted at customer retention. Is there anything that you saw over the later part of the year that drove the decision to launch this brand campaign? Just curious of why now around that initiative. Thanks.

Yes Dan, it's Langley. I'll take the first one around dealer ROI. I can assure you there is not another player in the marketplace of our scale that's driving 14% year-on-year lead growth. Okay? So, I think dealers very much value our scale, the fact that we have growth at that scale, compared to our competitors who have practically no growth. And I think the ROI on our pricing is very attractive. So, I think dealers -- the proof is in the pudding, and the number of paying dealers we have compared to all our competitors is substantially higher, and I think that speaks to scale and ROI.

In terms of the other piece of the question, I think you might be conflating two things. So, two things we talked about in the remarks were a brand campaign, which better articulates our differentiation to consumers and how we offer a differentiated, and in our opinions, a superior value prop to the user, to the car shopper. Separate from that, we also are investing in products, features, tools that retain customers better, our existing consumers better during their shopping journey. So, two initiatives both related to consumers, but quite different in their execution.

Our next question comes from the line of Nick Jones with Citigroup. Please proceed with your question.

Hi, thanks for taking my questions. One on I guess kind of the M&A pipeline. How do you guys feel about that? Do you have -- are there targets out there, and are there any opportunities to kind of more aggressively enter some of the other products like P2P? Any color there would be great.

Yes Nick, we feel really good about our M&A pipeline. In fact, it's probably more robust now than it has been ever. And the reason for that is we are of scale, and I think we're now a very well-known company in the industry. And the industry has literally hundreds of businesses that -- many of whom have built great products but have a hard time cracking the code on going to market, and to attach to our platform is very compelling to a lot of those businesses. We've talked about the different flavors of M&A. The two that we've executed so far are really around scale and growing the scale of our sort of core listings products offering to dealers. We've talked about two other flavors. One would be other ancillary products that we could sell to dealers, for instance, and then the third is technologies that would advance these emerging opportunities much more quickly, which is what you're describing with the P2P. And, yes, there are if not hundreds, there dozens of businesses out there that have built some really interesting products. But these are really hard challenges to crack the code on, and so those who can't make it alone, I think are realizing the potential that their products may have when mapped against our close to $40 million uniques a month. So, we feel great about M&A. We have I think emphasized how that will be a critical component to our growth strategy.

Got it. And one quick follow-up separate to that is Google announced they're potentially going to get to rid of third-party cookies in the next two years. How does that impact acquisition cost or your marketing strategy? Do you have any kind of early thoughts on what the outcome of that might be?

I mean, we're keenly aware of the changes that have happened at Apple and that Google has recently announced. It's something that we and every other consumer internet company are beginning to get our arms around and understand how to navigate with those new rules sort of on the field. It's for that and many other reasons why we emphasize the importance of building our brand, and direct channels, and the value of our audience, because if you can't retarget through other means, then it's arguably an opportunity for us to have more leverage in the value of our own audience.

Great. Thanks for taking my questions.

Our next question comes from the line of Marvin Fong with BTIG. Please proceed with your question.

Great. Thank you for taking my question. My first question I'll start with is on the attach rate. 30%, very good number. I think it was up 4 points this year. I think in 2018, it was up 7 points. So could you just kind of talk about how the attach rate is evolving it and how you think about it for the coming year? Thanks.

Hi Marvin, Sam Zales. It's a bit of what I answered earlier on the call in the message that we really had one additional product beyond our listings business, our core listings business, for the last several years. So that growth rate from '17 to '18 and '18 to '19 mostly reflects that that branding product, the focus product, allows a dealer brand at the point of sale on the vehicle detail page, was the only product that lifted up that rate over that early period in '17 to '18 and the start of '18 to '19. Early innings in all of those new products that really launched at the beginning of last years. That would be the delivery product that we talked about, and then the broader set of the RPM digital marketing suite, which was amplified. The retargeting product, which launched at the beginning of last year. And then, the additional -- now the launch of the social product, which has just launched. So, I'm actually really excited of the fact that we've made it to 30% on the penetration rate, but we look for that to continue to accelerate because of our new products just getting to market. So, you'll hear more about this as we go forward, but I think the point being that big attach rate reflected focus. Now these next set of products that are coming to market and really hitting their more mature phase will be the growth path on that going forward.

Great, thanks. And as a follow-up, just digging into the change in the ad load. Just curious at what point in the navigation experience did you find that consumers were not converting as a result of I guess too many ads on the site? It just seems like you guys don't really have a lot of ads as it was compared to some of your peers. And just curious what was it about the previous experience that you wanted to change?

Yes. So we [indiscernible] test a whole bunch of things, and it's probably not enough time in this call to get into the various parts of our site and where we find conversion.

All right, great. Thank you.

Our next question comes from the line of Ron Josey with JMP Securities. Please proceed with your question.

Great. Thanks for taking the call. Maybe I wanted to talk a little more, Jason, in the focus on P2P specifically, now that it's fully digital. I know you said revenue is small. I just wanted to better understand, now that is digital, how you plan to market this going forward, and specifically, market to consumers, but also how dealers might be more involved here as they could potentially deliver instant prices to customers. And I think you mentioned it as well, maybe in your answer to financials, but does guidance really include any contribution from P2P? Thank you.

Hey, Ron. So, we are testing, to follow on to Langley's last comment. We are always testing a number of ways to market our peer-to-peer offering to consumers. It's very early days in that marketing. We do feel confident now with fully digital capability that we have a truly differentiated experience to market, and so we are excited that we've reached product differentiation, and now we're tinkering with marketing. How that relates to dealers having an opportunity, a lot of the consumers who set out to sell their car to another consumer in the peer-to-peer eventually just get tired of it, and they don't want to go do test drives themselves, and they don't want to deal with other people sort of haggling with them. And so, that is very much an opportunity for -- that's a pool of cars that dealers would love access to. And so, you've heard us talk about trade-in, and that's an area where peer to peer and trade-in are really nicely linked because a good portion of our peer-to-peer sellers are interested, if not initially, then certainly after some time and they've gotten some P2P fatigue, interested in hearing from a dealer. And so, it's early, but we are working on having the ability for dealers to bid on principally peer-to-peer cars today. And the 2020 guidance includes very little revenue from P2P.

Got it. Thank you, Jason.

Our next question comes from the line of Derek Glynn from Consumer Edge Research. Please proceed with your question.

Yes, thank you for taking the question. Just wanted to get more color on the strategic rationale behind acquiring Autolist. It just seems like a smaller marketplace, and you already have this leading scale. You mentioned an acquire investment. So, is there anything from a technology or engineering town standpoint, or perhaps something else that was worth bringing it under your umbrella?

This is Jason, again. It's certainly engineering talent. They have a fantastic team in San Francisco, who despite their, at least to us, relatively smaller scale, have built a lot of great innovation. But the other thing it does is it gives us the ability to get more scale for dealers, and do it in a really cost efficient, accretive way, we believe, when you look at the unit economics. And so, we are always -- hopefully you've gleaned this from all of our comments today. We are always going to try to get more leads to deliver to dealers because we always want to give them more value, and as Langley said, give them more scale. And so, despite the fact that we're delivering really nice scale today, market leading scale today, if we can do more and do more with attractive unit economics, we are absolutely going to go do that. And so it's -- I would say it's -- first and foremost, it allows us to be a bigger, better, stronger partner to our dealers. It allows us to do it cost effectively, and we get the benefit of a super innovative team.

Got it. Thank you.

Our next question comes from the line of Jed Kelly with Oppenheimer. Please proceed with your question.

Great. Thanks for sneaking me in. With your 30% attach rate, higher ROI, and in your comment earlier of driving more leads to dealers, I guess just how do you view of more dealers using you as their exclusive marketplace? Is there any incentives you can put in that sort of drive an exclusive relationship?

Jed, it's Sam Zales. It's a really good question. I don't think we are out in the marketplace selling against the competition. I think Langley said well. If you've got the biggest scale in the marketplace and information on close rates of the connections you're driving to dealers, they will come out with a return on investment that is really attractive. I think any smart investor, any smart dealer who is investing in customer acquisition marketing subscriptions would say that if it's making me the most money, I'm going to keep spending more on it, and we're going to keep collecting more of those dollars in the marketplace, probably at the cost of their spend on any offline marketing certainly, and that's why we're moving to this digital marketing suite and taking over that $14 billion of spend that dealers are making today on digital marketing. But then also, as you say, looking at how they're spending on competitors and measuring that ROI. As Langley said, we don't see any player in the marketplace is at our scale and growing connections and leads, and we're excited about that and what that means to that total spend the dealers will make. It does require us to continue looking at third-party research and our own data partnerships to take the information on what the close rates are of those leads. I've talked about this for the last couple of years that we have a lot of data sources that demonstrate a tremendous ROI from the direct connection of that lead into a closed sale, clicks from our website to dealer websites, and walk-in traffic. But you'll be hearing more from us in the future on what the value of those connections are from CarGurus to those dealerships, and how they close that business, and how that might compare to dealers putting their inventory on third-party competitor sites, and how much that leads to any change in that impact on that dealer's closed sales. We're excited about what that research might look like to do just what you're saying. We're not going to go into an exclusive relationship. We'll just expect to win more of the dealer spend because of that data we're getting.

Thank you.

Our final question comes from the line of Aaron Kessler with Raymond James. Please proceed with your question.

Great. Thanks, guys. Maybe just a couple of questions. First, maybe just back to AARSD growth real quick. Maybe just your thoughts and kind of where you are in terms of ARRSD growth, especially in kind of the core U.S. product, and kind of where that could potentially go. I know it has slowed a bit. And then additionally, just maybe overall just brand awareness, where you think you're at today kind of on your latest [indiscernible] on a brand awareness. Thank you.

Aaron, it's Sam Zales. I'll start with the AARSD growth. At 19%, we think it's solid. I think we -- in the fourth quarter, I think you saw in the -- heard in the prepared remarks that we see each of the levers of AARSD growth being meaningful, which is interesting, and it's lead growth. That's why we keep talking about the constant focus on conversion of audience to leads. That's been the strongest element of that growth rate. We see that continuing. New products became more important in the fourth quarter. We're very impressed with that growth rate in new product adoption being more and more meaningful to AARSD growth. And then we've always said we'll be careful about pricing growth at a unit economic basis. That has been a factor as we've grown AARSD over time. We're being deliberate about that. We will continue to ask for the growth from those other two factors, but we'll also find that the unit pricing, where appropriate, for the deal is we're making the most money and return on our program will last per unit price increases as well. So, I feel good about those three levers as we go forward. From a brand awareness perspective, I think we shared that we -- we may have not shared that we were in the very high 70s, I think 79% aided awareness statistic for the business, which is significant growth over where it was a year ago, I think in the mid-teens. Is that right, guys? It grew, teens? I can't remember where it was before that. But 79%, we're pleased with that. But as Jason said before, we're going to continue to invest in brand differentiation. How does our unique proposition that consumers seem to see when they come through our incredible experience play out as you develop that brand in the marketplace? Hopefully see that number continue to increase.

And our unaided awareness still has enormous upside.

Got it. Great, thank you.

We have reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Langley Steinert for any closing remarks.

I want to thank everyone for calling in today, and as we said in our prepared remarks, I want to especially thank all the CarGurus employees for their hard work in 2019, and we're excited for 2020.

This concludes today's teleconference. You may now disconnect your lines at this time, thank you for your participation. And have a wonderful day.